Many of us will have avidly consumed TV business investment programmes such as Dragons’ Den from the comfort of our armchairs as we watch, possibly with a sprinkling of schadenfreude, a seemingly perfect business pitch unravel as the equity investor Dragons probe deeper into the detail and financing of a business plan. TV programmes like these offer non-business people an insight into the harsh reality of securing equity investment.

The TV show perfectly illustrates how much of a dragon’s den pitching for equity investment can be if business owners haven’t got their story and/or finances right. 

What’s also true is that equity investment has been hit hard in recent years due to political and economic turmoil. The value and volume of venture capital (VC) investment into UK businesses continued to slump in the opening quarter of 2023, falling to £2.9bn ($3.6bn) continuing the significant slowdown seen at the end of 2022, according to KPMG’s latest Venture Pulse report. 

Warren Middleton, Lead Partner of the Emerging Giants Centre of Excellence for KPMG in the UK, says that as a result of the pandemic, 2021 and early 2022 saw huge appetite for VC investment into UK innovation and fast-growth businesses, but it was “an outlier period”.

“What we are starting to see now is VC investment starting to come back to more normal levels, albeit compounded by a challenging economic environment. It is more of an adjustment than perhaps we would have seen if this had happened in isolation of the economic environment,” he says.

However, investor sentiment in the UK is starting to revert to “cautious positivity that the worst of the market turbulence might be over”, Middleton says. VC investment is expected to remain ‘soft’ over the next few months, but KPMG expects that some renewed activity will be seen in the second half of the year. 

Over the past six months, private equity investors have remained cautious and deals are experiencing some repricing or structural changes. Deals have generally taken longer to close, while some have gone on hold. 

However, there is reason for cautious optimism and an anticipated uptick in the number of new deals being brought to market later in the year, says Alex Hartley, M&A Partner and UK Head of Private Equity in KPMG Corporate Finance.

So, although the picture for entrepreneurs seeking equity investment could be better, there are still opportunities out there for the right businesses.

Whether you’re looking to grow organically, through acquisition or enter new markets, equity investment can provide the next critical step for fast growing businesses. Investors buy future performance so the ability to carry out short-term forecasts will be vital to secure investment. On the downside, short-term forecasts are widely complicated by the current cost pressures, but they are still manageable by expert testing of assumptions against competitors. What is trickier, however, is to foresee consumer sentiment and the inclination of consumers to buy goods. 

The key aspects investors are looking for now are strong management teams, high-growth businesses and resilience to global economic and political shockwaves. 

“Alongside growth, resilience became one of the priority investment requirements, such as a business’s ability to demonstrate strong visibility of future revenues, and on the cost side to be able to demonstrate that it has been able to pass on price rises to customers in a high inflationary environment,” Hartley says.

Disruptive business models and counter cyclical models such as healthcare are also attractive prospects to investors right now. Besides healthcare, other sectors that are attracting the attention of investors include business services, biotech and technology, media and telecom (TMT).

“In the private equity world, over the past few years approximately 60% of the deals have been in business services (principally tech-enabled) and TMT – sectors that have traded really strongly through some of the market uncertainty,” Hartley says.

He believes this is because they are usually contracted business models, often with clients on three-year contracts, providing future visibility of earnings. Or disruptive business models that are highly differentiated by tech platforms, with substantial intellectual property in the service proposition or in technology sectors with high barriers to entry always fare well.

Clear visibility of future earnings is critical in the current PE market, particularly because of structural changes in banks’ lending.

“I also think that the resilience shown in these sectors plays more favourably to navigating the credit challenges that have come from debt providers over recent months,” Hartley says.

With confidence not yet fully restored, PE investors aren’t yet under pressure to do deals; although their essence is to grow their money, it is almost as important for them to protect their downside in the current environment, he says.

Worryingly though, the location of a business remains an important factor, with London and the South East of England continuing to take the lion’s share of equity deals, according to Beauhurst’s Equity Investment Market Update. 

In the first quarter of 2023, the South of England received 68% of the total deals, down 4% from 2022. London alone received 43% (230) of the total number of deals and 61% of the total funds raised in Q1 2022. The South East received 13% of deals, the South West 5%, and the East of England 8%. 

In comparison, the North of England (Yorkshire and The Humber, the North East and the North West) secured just 12% of deals, a proportion that remains unchanged from 2022. Northern Ireland continued to receive the smallest share of equity rounds, at just 1%. 

Ultimately investors are looking to grow, too, so they want to be crystal clear on what the business owner’s story is, so it’s important to get your company’s story right about how you’ve survived the past two or three years, and what the next three year growth plan looks like. 

Differentiation, IP, barriers to entry, market outlook and resilience will be among the main issues investors will want to hear about. Armed with that information, business owners might then be able to tame the dragons of investment.